Sector Snapshot - Chooo,
Chooo, Railroads!
Sector Snapshot - Chooo,
Chooo, Railroads!
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Introduction
Kansas City Southern Industries |
 Railroads are an integral part of the American experience,
but mention the industry now-a-days and one is met with a response considerably
shy of unbridled enthusiasm. Those not familiar with the industry seem to
harbor the notion that rail technology has somehow been rendered obsolete.
"Oh yeah railroads, nobody rides in those old things anymore!" Well that's partly true, passenger service as a business is in a dismal state, but check the passenger list again. If you did you would see names like coal, agricultural commodities, forest products, chemicals, plastics, food, metals, minerals, ores, and automotive parts. All of which are happy to be on board, because freight can be handled more economically in the U.S and Canada than in other countries of the world. This is "largely" due to the fact that a high proportion of freight is moved in large units for long distances, and can therefore be carried in long cars which have a large capacity. Get the BIG picture? The Industry Besides boxcars, flatcars, and hoppers, a variety of specially designed freight cars have been constructed ad hoc. Special tank cars are used to ship gases, gasoline, oil, alcohol, acids, paints, and even pickles! Refrigerated cars, as well as heated cars for freezing weather, have also been designed for meat and other perishables. In addition, large semitrailers are carried piggyback on flatcars to facilitate "intermodal" service. This rapidly burgeoning segment of the railroad industry refers to freight that is moved by means of two or more modes of transport (containers and trailers shipped by rail, truck, barge or ship). Interestingly, more and more railroads now operate trains containing only piggyback equipment on schedules almost as fast as passenger trains. Freight service is generally of two types. One type carries bulk commodities, such as coal, grain, or metals, and usually runs from origin to destination without switching, but on no set schedule. The other type of freight service operates on a regular schedule on a set route and carries all types of commodities. Recent Developments The railroad industry leaders for the first three quarters of 1996 have beaten the Dow Jones Industrial Average returns by roughly 200 basis points (100 basis points = one percentage point). Tack on another four basis points with the effect of dividends. The "Class I" railroads (railroads with annual revenues of $250 million or more) have had an average price appreciation of 12% in the first nine months of this year, with the top six averaging 17%. Despite lackluster revenue comparisons, an industry-wide focus on enhanced operating efficiencies and improved asset utilization has reduced costs and contributed greatly to bottom line momentum. Historically "operating ratio" was not a buzzword in the rail industry, but tighter markets and management focus have swung momentum in the favor of cost control. Operating margins for the industry as a whole average 23%, which is pretty hefty. Going forward the railroad industry stands to benefit greatly from electricity deregulation, the growing movement toward privatization of national railroads systems, and the expected growth in commodity imports and exports from the third world. At CREF Investment Management economists project that electricity demand and coal traffic will grow faster than the overall economy by 2.5% in the coming decade. This development will add additional momentum to the already growing revenue figures for railroads that provide transport of coal. U.S. railroads are in the early stages of building an international presence. CSX, through its subsidiary Sea-Land, has established itself in Russia coordinating intermodal train operations. Wisconsin Central now has expanded into foreign markets in New Zealand and Great Britain. In addition, the pending privatization of the Federal National Railroad of Mexico (Ferrocarriles Nacionales de Mexico) bodes well for companies that have an interest in acquiring the franchise rights to this operation. Presently, all indications are that this privatization trend will continue. Consolidation Industry consolidation in the last couple of years has sparked tremendous debates concerning the possible detrimental effects of decreased competition. Burlington Northern's Merger with Santa Fe, and more recently the merger of Union Pacific and Southern Pacific, has provided ammunition for both parties in the debate. The perennially revisited issue of a "transcontinental railroad" (which both Canadian CRR and CP have realized) has also engendered fears of monopoly. Many observers feel that the vitality of the American railroad industry is dependent upon dynamic freight competition in the middle of the country. Without it, so called "captive shippers" with no transportation alternatives leave themselves open to possible price gouging by the railroads. In addition, many shippers argue that without viable competition many railroads will not feel the need to offer first rate service. From an investors perspective it is important to note that these issues will be revisited in the next couple of years and will have important implications with regard to future Federal regulation of the industry. Transmitted: 10/4/96 9:04 PM (railroad) |
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Definitions
Cash/Share: A measure of how much cash per share a company currently has. Current: The Current Ratio is a measure of liquidity. You just take the Current Assets and divide by the Current Liabilities. Ideally, this is 1.0 or greater in financially strong companies. DSO: Days Sales Outstanding measures the company's control on receivables. A company whose DSO is 50 takes 50 days to collect accounts receivable. Smaller numbers mean the company can use that money---a good thing. The figures herein use fiscal year receivable figures. EV/SR: The Enterprise Value/Sales Ratio is a better indicator than the PSR of the true value of a company. Where the PSR uses the company's market cap for the numerator, EV/SR looks at the Enterprise value. Both ratios use the denominator of trailing revenues. To get the company's enterprise value take the market cap (share price times shares outstanding), add the long term debt, and then subtract the cash and cash equivalents. GM: Gross margin, a measure of what percentage of each dollar of sales they get to keep after paying for the costs of manufacturing it. Market Cap = Market Capitalization. This is the number of shares outstanding times the current share price. Essentially, this is what the company is currently on sale for -- or at least what someone who acquired the company would have to pay. PEG: Price/Earnings Ratio over earnings per share (EPS) Growth Rate. This is a Foolish valuation that is also known as the Fool Ratio. It is detailed in our PEG area in Stock Research (Fool Main Screen --> Stock Research --> The Fool Ratio). Essentially, this is a short-hand for how underpriced or overpriced a stock is given the assumption that the Price/Earnings ratio should equal the rate of EPS growth. P/E: The Price/Earnings Ratio, this essentially gives you a ratio of how much you are paying for a dollar of earnings, allowing you to compare a stock to its peers on an apples to apples basis. PSR or P/S: The Price/Sales Ratio, this is dervived from dividing the last four quarters trailing revenues by the current market capitalization of the company. This gives a guide to how a company is valued relative to its peers when it does not have earnings to currently compare. PM: Profit margin, a meaure of what percentage of each dollar of sales a company gets to keep after paying for everything. RS: Relative Strength, a measure of how well the stock has performed relative to the market over the past two years. Scored on a scale of 1 to 99 with 99 being the best. Surprise: This ratio represents the latest quarter's EPS divided by the EPS that had been estimated. So, a 6% surprise simply means that EPS were 6% greater than expectations. WC/MC: Working capital is the difference between current assets and current liabilities. This is a measure of what percentage of the market cap is currently found in the working capital, signaling value. (WC-I)/MMC: Working Capital minus the Inventory divided by the Modified Market Cap. (Modified Market Cap. is the Market Cap. plus the company's long-term debt.) This ratio measures the working capital that's not tied up in inventory relative to its current market value. This is a measure of the working capital that can be used to growing the business. The inventory is subtracted from the working capital because in this industry the liquidation value of the inventory is lower than what the FIFO or LIFO value would indicate. YPEG: The Year-ahead PEG, this guy is also detailed in our PEG area in Stock Research (Fool Main Screen --> Stock Research --> The Fool Ratio). Essentially, this is a short-hand for how underpriced or overpriced a stock is given the assumption that the Price/Earnings ratio should equal the estimated long-term growth rate. |
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Burlington Northern/SF Corp.
The Business Burlington Northern Santa Fe owns 31,000 route miles of track covering 27 states and two Canadian provinces, making it the largest railroad in North America. In September 1995 Burlington Northern Inc. merged with Santa Fe Pacific Corporation to form Burlington Northern Santa Fe. Burlington's President & CEO, Robert Krebs, has received numerous accolades within the industry, as well as from the business community as a whole for his engineering of the successful merger. Financial Information & Recent Developments Total revenues for 1995 were $6,183 million compared with revenues of $4,995 million for 1994. The $1,188 million increase reflects the addition of $802 million of SFP revenues for the period between September and December of 1995. Without this influx, revenue grew at a modest 8%, primarily due to improved Coal and Agricultural commodities revenues. The company should continue to benefit from economies of scale related to its merger. During the second quarter operating expenses decreased 1% from the 1995 period, despite a 3% revenue increase. Compensation and benefit expenses dropped about 3% on a year-over-year basis as well. The overall operating ratio decreased 3.6 percentage points, with all indications that cost cutting momentum is sustainable going forward. Transmitted: 10/4/96 3:18 PM (bni1004) |
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Canadian Pacific Limited
The Business Canadian Pacific Limited is one of Canada's largest companies. A diversified firm involved in rail, maritime, energy, real estate , and hotel businesses. The company's core businesses include transportation and energy, followed up by its ancillary businesses, real estate, hotels, and investments. CP operates 18,100 miles of track serving most of the largest Canadian cities, as well as parts of Midwestern and Northeastern U.S. Financial Information & Recent Developments The management of Canadian Pacific has continued to transform the company by focusing upon a core of profitable assets (CP Rail, PanCanadian Petroleum, Fording Coal, CP Hotels and CP Ships). Ever since CP announced its decision in November 1995 to reorganize the company and incorporate the rail business separately, speculation has run rampant about the spin-off that has yet to materialize. CP's core assets are now 100% owned or tightly controlled, and with the exception of rail, all are generating surplus discretionary cash flow. The stock still currently trades at a 17.5% discount to Net Asset Value despite a strong share performance in the last year. In conjunction with the aforementioned reorganization CP has reduced administrative staff levels by 14% (800 employees), this number should increase to 1700 by 1997. All of this has resulted in a 6% increase in operating income for the latest quarter, despite a 7% decline in freight volume. CP reported net income of $179.6 million, or $0.53 a share in the second quarter of 1996. In the previous year's quarter net income was $124.5 million, or $0.36 per share. Transmitted: 10/4/96 2:51 PM (cp1004) |
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Conrail Inc.
The Business Conrail Inc., formerly known as Consolidated Rail Corp. was formed from a combination of the rail assets of bankrupt Penn Central Transpiration Company and five other railroads in April 1976. Conrail operates 11,000 rout miles of track in 13 Northeastern states. Financial Information & Recent Developments In conjunction with the state of Pennsylvania, Conrail has completed a $575 million infrastructure project to enlarge tunnels and raise bridges in the Pittsburgh, Philadelphia and Harrisburg areas of PA. The completion of the project has enabled Conrail to "double-stack" containers on its trucks, allowing CRR to double its freight capacity and lower costs. Through the first eight weeks of the third quarter intermodal loadings has shot up 10%. Net income for the first six months of 1996 were $57 million and included an after-tax charge of $83 million, consisting of termination benefits provided for non-union employees participating in the voluntary retirement and separation programs. Net income for the first six months of 1995 was $178 million. Operating revenues increased $26 million, or 14% to $1.838 million, for the first six months of 1996, compared to $1.812 million in the previous year. Transmitted: 10/4/96 12:52 PM (cr1004) |
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CSX Corporation
The Business Richmond based CSX Corporation provides services that include rail, intermodal, ocean, and barge transportation. The company has about 18,645 route miles of track in 20 U.S. states, as well as Ontario, Canada. CSX's ocean transportation subsidiary Sea-Land (container shipping and logistics unit) faces favorable capacity growth through the end of 1997. In 1995 Sea-Land generated operating income of $238 million buoyed by a 12% increase in container shipping levels. One of CSX's greatest assets is Chairman and CEO John W. Snow., who is known throughout the industry for running extremely shareholder friendly operations. Indeed, shareholders will get a boost from the estimated $350 million in free cash flow that will be generated in 1996. This coupled with an aggressive debt reduction regime has put the company in excellent fiscal health. Financial Information & Recent Developments The company reported net earnings for the quarter ended June 28 of $234 million, or $1.11 per share. Without the effects of a restructuring charge, earnings for the same quarter 1995 were $179 million, or $0.85 per share. The company's rail unit produced record quarterly operating income of $312 million despite a sluggish 7% increases in coal revenues, which constitute more than a third of the company's rail traffic. Much of the gains were attributed to cost cutting. Transmitted: 10/4/96 3:22 PM (csx1004) |
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Kansas City Southern Industries
The Business Kansas City Southern Industries is made up of two business segments, financial services and transportation. In addition the company has a 40% equity stake in DST Systems, as well as 49% stake in Mexrail, Inc. The financial services segment owns both the Janus and Berger family of funds with $42.8 billion in assets under management. Kansas City Southern Railroad has about 2,536 total track miles covering eight states in the Midwest. Financial Information & Recent Developments For the six months ended June 30, 1996 earnings were $42.3 million, or $1.06 per share, versus $35.9 million, or $0.80 per share in comparative 1995. Year to date consolidated revenues were $408.2 million versus $378 million the previous year. Revenue Breakdown
1996 1995
Railway $244.9 $247.7
Asset Mngmt. $147.9 $11.5
Corporate $15.4 $18.8
Growth in revenues for the first half of 1996 reflects strong growth in assets under management. Operating expenses in the first half of 1996 increased 2% to $322 million. Transmitted: 10/4/96 12:27 PM (ksu1004) |
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Norfolk Southern Corporation
Norfolk Southern Corp is a holding company formed by the merger of Norfolk & Western Railway Co. with Southern Railway back in 1982. NSC operates 14,500 miles of track in 20 states and Ontario, Canada. Transmitted: 10/4/96 6:26 PM (nsc1004) |
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RailTex Inc.
The Business RailTex Inc., unlike the other companies in this snapshot, is primarily an operator of short-line freight railroads. The company serves over 670 customers through a network of 25 railroads covering more than 3,500 miles of track in 20 states, as well as Canada and Mexico. The company also has a 12.97% equity interest in Ferrovia Centro Atlantica, S.A., which will operate a 4,400 mile railway in Central and Eastern Brazil. The company has a decentralized management structure amenable to portfolio growth through purchases, leases, and contracts to operate. Bruce Flohr, Chairman and CEO of RTEX, states in the 1995 annual report, "We have an acquisition credit line of $75 million, and a professional acquisition team in place and in action. RailTex is on the verge of a new era of growth, Welcome Aboard." Financial Information & Recent Developments In the second quarter of 1996 RailTex posted record carloadings, operating revenues, operating income, net income, and earnings per share. Compared with the year ago quarter, carloadings increased by 13% to 89,803. Operating revenues increased by 10% to $30,148,000. Operating income increased by 28% to $5,658,000 and net income increased by 29% to $2,621,000. On June 4, 1996 the Company acquired 100% of the outstanding stock of the Indiana & Ohio Railcorp. This acquisition constituted 24% of the second quarter's revenue growth. Transmitted: 10/4/96 12:06 PM (rtex1004) |
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Wisconsin Central Transportation
The Business Wisconsin Central Transportation Corp. is a holding company that operates the largest "regional" railroad in the U.S. WCLX has 2,817 miles of track in Wisconsin, Michigan, Illinois, Minnesota, and Ontario. Wisconsin Central is well known in the industry for its international operations. WCLX owns 23% of Transzrail Limited in New Zealand and 32% of English Welsh & Scottish Railways Limited in the U.K. Financial Information and Recent Developments During the first six months of the year TranzRail Limited and the EW&S Railway added nearly $15 million to the bottom line, or $0.29 a share. International equity income should contribute 49% of the company's net income in 1996, which would represent a 56% return on the company's overseas investment. There is considerable speculation that WCLX will continue to support its revenue and earnings growth through domestic acquisitions. Wisconsin Central recently earned $0.34 per share on an operating basis versus $0.17 in last year's second quarter. WCLX's operating revenue increased 8.1% to $69.5 million. The company reported a disappointing 78.6% operating ratio, compared with 74.7% in the previous year (the ratio was pulled down by dismal 10% margins in April due to inclement weather). Virtually all of the company's freight revenues are chugging along at an accelerated pace, with no sign of slowing. Coal, paper, pulpboard, lumber and intermodal are all generating double digit revenue growth. Transmitted: 10/4/96 3:10 PM (wclx1004) |
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Financial Rations
Railroads Ticker PEG YPEG PSR ROE EV/SR
Burlington Northern BNI 0.91 0.65 1.67 3% 2.21
Canadian Pacific CP 0.78 0.68 0.92 -13% 1.31
Conrail CRR 1.19 0.94 2.98 9% 3.47
CSX CSX 1.26 1.02 1.10 16% 1.25
Kansas City Southern KSU 0.94 0.70 2.41 35% 3.16
Norfolk Southern NSC 1.70 1.47 2.51 15% 2.83
Railtex RTEX 0.78 0.57 1.86 7% 2.34
Wisconsin Central WCLX 0.81 0.62 3.76 20% 4.24
Transmitted: 10/4/96 11:16 AM (ss1004d)
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Composite Statistics
(V Line) 1993 1994 1995 1996 1997 Revenues($mil)* 35725 37626 40010 44615 48475 Operating Margin 25.3% 26.6% 26.1% 27.6% 27.9% Depreciation 3245.0 3325.0 3238.1 3620.0 3995.0 Net Profit 2892.6 3410.9 3777.3 4500.0 5240.0 Income Tax Rate 34.5% 36.8% 36.4% 38.0% 38.0% Net Profit Margin 8.1% 9.1% 9.4% 9.7% 10.4% Working Capital d1918 d1549 d2622 d1625 d1550 Long Term Debt 17105 16484 20298 21915 21815 Net Worth 23020 24859 29120 31910 35160 Avg. Annual PE 16.4 13.90 14.40 NA NA |
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Sector Snapshot is our attempt to help Fools the world around generate new investment ideas. Whether a legitimate industry or a group of random stocks we have decided to link together under a hip moniker, Sector Snapshot aims to deliver serious research content that will allow any Fool to begin their journey to financial excess. Our short examinations of the companies in Sector Snapshot come from a multitude of sources. In no particular order, we look at press kits, Value Line, EDGAR, First Call estimates, Zacks Investment Research Estimates, Daily Graphs, Hoover's Online, Morningstar Stock Reports, Nelson's Investment Research, Investor's Business Daily, Dow Jones Retrieval, Disclosure Financial Reports and our own common sense.
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